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www.dbsvickers.com

Refer to important disclosures at the end of this reported: MY / sa: JC

HOLD S$3.23 STI : 3,025.04(Downgrade from BUY)

Price Target : 12-Month S$ 3.40 (Prev S$ 3.50)Reason for Report : JV, delay of Libyan projectsPotential Catalyst: Contract wins, seal Libyan projectsAnalystAi Teng Tan +65 6398 7967AiTeng@dbsvickers.com

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R e l a t i v e I n d e xS $

H y f lu x ( L H S ) R e la t iv e ST I IN D E X (R H S )

Forecasts and ValuationFY Dec (S$ m) 2008A 2009A 2010F 2011FTurnover 554 525 408 587EBITDA 86 104 98 133Pre-tax Profit 70 83 66 87Net Profit 59 75 60 79Net Pft (Pre Ex.) 59 75 60 79EPS (S cts) 11.0 14.0 11.2 14.7EPS Pre Ex. (S cts) 11.0 14.0 11.2 14.7EPS Gth Pre Ex (%) 74 28 (20) 32Diluted EPS (S cts) 11.0 14.0 10.8 14.2Net DPS (S cts) 3.4 5.0 5.0 5.0BV Per Share (S cts) 55.4 68.2 74.4 84.1PE (X) 29.4 23.1 28.9 21.9PE Pre Ex. (X) 29.4 23.1 28.9 21.9P/Cash Flow (X) 24.7 19.5 23.5 17.6

EV/EBITDA (X) 22.4 19.2 21.6 16.0Net Div Yield (%) 1.1 1.5 1.5 1.5P/Book Value (X) 5.8 4.7 4.3 3.8Net Debt/Equity (X) 0.5 0.6 0.8 0.8ROAE (%) 22.0 22.6 15.7 18.6

Earnings Rev (%): (27.8) (12.4)Consensus EPS (S cts): 15.0 18.3ICB Industry :UtilitiesICB Sector: Gas; Water & MultiutilitiesPrincipal Business: An integrated water and liquid treatmentcompany specializing in membrane technologies.

Source of all data: Company, DBS Vickers, Bloomberg

At A GlanceIssued Capital (m shrs) 571Mkt. Cap (S$m/US$m) 1,845 / 1,368Major Shareholders

Ooi Lin Lum (%) 31.2UBS AG (%) 5.6

Free Float (%) 63.2Avg. Daily Vol.(000) 1,426

DBS Group Research . Equity 3 Aug 2010

Singapore Company Focus

HyfluxBloomberg: HYF SP | Reuters: HYFL.SI

Mitsui JV long term positive Mitsui JV is another formidable funding platform after

JGC JV

Lowered FY10/11F earnings by 28%/12% as Libya facesdelay

Revised TP to S$3.40; Downgrade to Hold given limitedupside

JV fits asset light strategy. Hyflux has formed a 50/50 Galaxy JV

with Mitsui & Co to pursue growth in Chinas water sector. For a start,Galaxy will 1) take over Hyflux Water Trust (S$234.8m) and 2) acquire

four projects from Hyflux (S$74.3m). Other than S$6m divestment

gain, this deal is almost cashflow neutral to Hyflux. More importantly,

this is a partnership with strong financial leverage for Hyflux to capture

larger and more complex water projects in China. Galaxy is also a much

stronger platform than Hyflux Water Trust to undertake Hyfluxs

existing and future projects in China.

Libya talks proceeding but likely delay. Although Libyacontinues to negotiate with Hyflux over Tripoli and Benghazi, officials

are prioritizing a smaller project (capacity: 40MLD) which Hyflux has

also joined bid. Given the slower than expected progress in Libya, it

seems unlikely that Hyflux can seal the two key contracts by this year.

Hence, we have pushed back S$158.6m and S$264m of expected EPC

contributions from Libya to FY11 and FY12 respectively.

TP revised to S$3.40.Notwithstanding a much lower FY10F, our TPis marginally affected because we have rolled over valuation peg ofHyfluxs EPC earnings to FY11 and raised Hyfluxs stake in the Trust to50% from 31.4% previously. This is assuming that Galaxys acquisitionof the Trust is successful.Downgrade to HOLD on valuation.Hyflux has performed wellsince our upgrade in June. In view of the limited upside to our revisedSOTP fair value of S$3.37 (23x FY11 PE) now, we are downgrading our

recommendation to Hold from Buy. We would review our stock call onpositive catalysts such as new contract wins.

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Company Focus

Hyflux

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JV fits asset light strategy. Hyflux has signed a joint

venture agreement with Mitsui & company to develop waterprojects in China. The partners have formed a 50/50 JV

company called Galaxy NewSpring to serve as their vehicle for

investing, developing and managing projects in the fast

expanding water sector in China. For a start, Galaxy will 1)

acquire all shares of Hyflux Water Trust for S$234.8m and 2)

buy over four projects from Hyflux for S$74.3m.

As Hyflux already owns 31.37% of the Trust, it will fund its

portion of the remaining 19% stake (S$43.7m) of the Trust

with the sale of 50% interest (worth S$37.2m) in the other 4

completed plants to Galaxy. Hence, the deal is almost

cashflow neutral to Hyflux. In fact, Hyflux will be booking

S$6m divestment gain for its sales of the four plants namely

Jiangxi Leping Water Treatment Plant, Anhui Mingguang

Water Treatment Plant, Hunan Taoyuan Water Treatment

Plant and Liaoyang Gongchangling Water Treatment Plant.

More importantly, this is a partnership with strong financial

leverage for Hyflux to capture market share in China, where

opportunities for larger and more complex water projects are

appearing in the horizon.

Industry data given by Global Water Intelligence showed that

the Chinese government would pump some US$450 billion

into environmental protection and water resource

developments between 2011 and 2015. This is up from theUS$$219 billion for the period 2006 to 2010.

PRC is pumping resources in environmental protection andwater resource development

Source: GWI, Jan 2010

Moreover, Galaxy is also a much stronger platform to

undertake Hyfluxs existing and future projects in China.

Libya faces delays. It is over a year now since Hyflux firstsigned the MOA with Libya to develop two desalination

plants in Tripoli and Benghazi totaling 900,000m3/day in

desalination capacity. We have estimated these contracts

could add S$1b to Hyfluxs EPC orderbook and extend the

firms earnings visibility to 2013. Hyflux continues to discuss

technical specifications with its clients but negotiations are

progressing a tad too slowly. Based on our experience with

other corporates operating out of Libya, we believe it is

unlikely that Hyflux can seal the two key contracts by this

year since the government is obviously more interested in

tackling a much smaller project with a capacity of 40MLD at

the moment. Hyflux has bidded for the smaller projects but

barring further update from the company on the Tripoli and

Benghazi projects, we have pushed back S$158.6m and

S$264m of expected EPC contributions from Libya to FY11

and FY12 respectively.

2006-2010 2011-2015

USD224 bn

USD787 bn

Over 100% increase in

budget for

environmental protection

and water resource

development

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Company Focus

Hyflux

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Estimated value and earnings contribution of Hyfluxs Libyan projects

Date L ocationCapacity(m 3/ day)

Value ofcontract(US$m)

Es t. EPCvalue(S$m)

FY10 FY11 FY12 FY13 FY14 FY10 FY11 FY12 FY1325-Jun-09 Tripoli 500,000 450 587.3 - 88.1 146.8 234.9 117.5 88.1 146.8 234.9 117.5

25-Jun-09 Benghazi 400,000 360 469.8 - 70.5 117.5 187.9 94.0 70.5 117.5 187.9 94.0

Pre vious e xpected EPC contributions(S$m)

Revis ed ex pected EPC contributions(S$m)

Source: Company, DBS Vickers

Sum-of-Parts ValuationValuation Multiple Value Value pershareCore earning streams FY11 PATMI methodology (x) (S$m) (S$)

Engineering, procurement & construction 71.92 PER 16.0 1150.7 2.07

lndustrial 7 PER 13 89.4 0.16

O&M/ Trustee Management fees/Others 0.46 PER 8 3.7 0.01

Equity value of China BOT projects 59.87 DCF 8% WACC; 0%LT growth

398.1 0.72

Equity value of Algeria BOT projects DCF 10% WACC; 0%LT growth

109.1 0.20

AddBook value of 50% stake in HWT Book value 117.00 0.21

Fair value 1868.0 3.37Implied PER (FY11) 22.8

Note: Equity value of BOT projects is derived after stripping out the 5 assets to be divested to Hyflux Water TrustSource: Company, DBS Vickers

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Company Focus

Hyflux

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Income Statement (S$ m) Balance Sheet (S$ m)FY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011FTurnover 554 525 408 587 Net Fixed Assets 57 135 118 97Cost of Goods Sold (384) (308) (195) (331) Invts in Associates & JVs 95 103 105 108Gross Profit 170 217 213 256 Other LT Assets 311 286 406 526Other Opng (Exp)/Inc (93) (144) (141) (148) Cash & ST Invts 91 167 102 134Operating Profit 77 73 72 108 Inventor 34 32 20 34Other Non Opg (Exp)/Inc 0 12 6 0 Debtors 41 222 173 248Associates & JV Inc (1) 3 3 3 Other Current Assets 219 128 128 128Net Interest (Exp)/Inc (5) (4) (15) (24) Total Assets 847 1,073 1,052 1,275Exceptional Gain/(Loss) 0 0 0 0Pre-tax Profit 70 83 66 87 ST Debt 50 45 45 45Tax (8) (9) (7) (9) Other Current Liab 274 273 170 291Minority Interest (3) 1 1 1 LT Debt 208 355 405 455Preference Dividend 0 0 0 0 Other LT Liabilities 6 6 6 6Net Profit 59 75 60 79 Shareholders Equity 298 365 398 451Net Profit before Except. 59 75 60 79 Minority Interests 10 28 27 27EBITDA 86 104 98 133 Total Cap. & Liab. 847 1,073 1,052 1,275Sales Gth (%) 187.5 (5.3) (22.2) 43.8 Non-Cash Wkg. Capital 19 110 151 120EBITDA Gth (%) 63.8 21.6 (6.1) 36.0 Net Cash/(Debt) (167) (234) (348) (367)Opg Profit Gth (%) 113.0 (6.0) (0.5) 49.5Net Profit Gth (%) 79.2 27.1 (20.2) 31.9Effective Tax Rate (%) 11.6 10.5 10.5 10.5

Cash Flow Statement (S$ m) Rates & RatioFY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011FPre-Tax Profit 70 83 66 87 Gross Margins (%) 30.7 41.3 52.2 43.6Dep. & Amort. 10 17 17 22 Opg Profit Margin (%) 14.0 13.9 17.8 18.5Tax Paid (1) (8) (7) (7) Net Profit Margin (%) 10.7 14.3 14.7 13.5Assoc. & JV Inc/(loss) 1 (3) (3) (3) ROAE (%) 22.0 22.6 15.7 18.6Chg in Wkg.Cap. (67) (45) (41) 29 ROA (%) 8.5 7.8 5.6 6.8Other Operating CF 17 16 0 0 ROCE (%) 13.4 9.5 7.7 10.4Net Operating CF 30 61 32 129 Div Payout Ratio (%) 31.2 35.7 44.7 33.9Capital Exp.(net) (19) (9) 0 0 Net Interest Cover (x) 14.2 16.2 4.8 4.6Other Invts.(net) (75) (42) (120) (120) Asset Turnover (x) 0.8 0.5 0.4 0.5Invts in Assoc. & JV (6) 0 0 0 Debtors Turn (avg days) 28.7 91.5 176.6 130.9Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 131.5 300.8 438.1 262.4Other Investing CF 8 (42) 0 0 Inventory Turn (avg days) 26.6 41.5 53.6 32.1Net Investing CF (92) (93) (120) (120) Current Ratio x 1.2 1.7 2.0 1.6Div Paid 10 18 27 27 uick Ratio x 0.4 1.2 1.3 1.1Chg in Gross Debt 51 135 50 50 Net Debt/Equity (X) 0.5 0.6 0.8 0.8Capital Issues 0 0 0 0 Net Debt/Equity ex MI (X) 0.6 0.6 0.9 0.8Other Financing CF (9) (8) 0 0 Capex to Debt (%) 7.3 2.1 0.0 0.0Net Financing CF 32 108 23 23 Z-Score X 2.2 2.2 3.0 2.6Net Cashflow (30) 76 (65) 32 N. Cash/(Debt)PS (S cts) (31.1) (43.6) (65.0) (68.4)

Opg CFPS (S cts) 18.1 19.7 13.7 18.6Free CFPS (S cts) 2.1 9.7 6.0 24.0Quarterly / Interim Income Statement (S$ m) Segmental Breakdown / Key Assumptions

FY Dec 2Q2009 3Q2009 4Q2009 1Q2010 FY Dec 2008A 2009A 2010F 2011FTurnover 134 127 176 101 Revenues (S$ m)Cost of Goods Sold (71) (81) (97) (60) Municipal 467 470 345 514Gross Profit 64 45 78 41 Industrial 76 51 59 67Other Oper. (Exp)/Inc (35) (25) (65) (30) O&M/ Trustee Management 1 4 4 6Operating Profit 29 20 13 11 Divestment Gains 10Other Non Opg (Exp)/Inc 0 0 12 0 OthersAssociates & JV Inc 2 1 1 (1) Total 554 525 408 587Net Interest (Exp)/Inc (2) (2) 2 (3) EBIT (S$ m)Exceptional Gain/(Loss) 0 0 0 0 Municipal 63 69 66 98Pre-tax Profit 29 19 28 7 Industrial 1 4 6 10Tax (2) (1) (4) (1) O&M/ Trustee Management 13 0 0 1Minority Interest (1) 0 1 1 Divestment GainsNet Profit 26 18 26 6 OthersNet profit bef Except. 26 18 26 6 Total 77 73 72 108EBITDA 33 24 35 14 EBIT Margins (%)

Municipal 13.6 14.6 19.0 19.0Sales Gth (%) 52.4 (5.9) 38.8 (42.3) Industrial 1.0 7.5 11.0 15.0EBITDA Gth (%) 169.0 (27.2) 45.4 (60.5) O&M/ Trustee Management 1,235.2 8.0 10.0 10.0Opg Profit Gth (%) 170.7 (30.6) (33.9) (16.1) Divestment GainsNet Profit Gth (%) 403.7 (29.9) 42.9 (75.3) OthersGross Margins (%) 47.6 35.8 44.5 40.9 Total 14.0 13.9 17.8 18.5Opg Profit Margins (%) 21.5 15.8 7.5 11.0 Key AssumptionsNet Profit Margins (%) 19.2 14.3 14.7 6.3 New order wins 841.3 1,269.7 124.2 250.0

Source: Company, DBS Vickers

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Company Focus

Hyflux

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DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)BUY (>15% total return over the next 12 months for small caps, >10% for large caps)HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)FULLY VALUED (negative total return i.e. > -10% over the next 12 months)SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)Share price appreciation + dividends

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Company Focus

Hyflux

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